Glacier Bancorp, Inc. Q4 FY2021 Earnings Call

Thank you for standing by, and welcome to the Glacier Bancorp's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host, President and CEO of Glacier Bancorp, Randy Chesler. Sir, please go ahead.

All right. Thank you, Latif, and good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator. We closed out the fourth quarter and full year 2021 encouraged by our extremely strong loan and net interest income growth. Results were better than what we expected and clearly show that we are in some of the best long-term growth markets in the country. The Glacier team and our unique business model enable us to build solid customer relationships and produce very strong results in all of our divisions, as we continue to build one of the premier regional banks in the west. I'll touch on some of the business highlights first and then provide some additional thoughts on the quarter and full year. The loan portfolio excluding the Payroll Protection Program loans had strong organic growth of $448 million or 16% annualized. The loan portfolio organically grew $1.2 billion or 11% annualized from the beginning of the year. This was a record level of quarterly growth for the company. Net interest income in the quarter on a tax-equivalent basis and excluding PPP loans was $184 million, an increase of $29.4 million or 19% from the prior quarter. On a full year basis, net interest income was $636 million, an increase of $57.5 million or 10% over the prior year. Core deposits continued to flow into our divisions, organically growing $560 million or 13% during the quarter and growing $3.3 million or 22% annualized for the year. Net income for the year was $285 million, an increase of $18.4 million or 7% from $266 million in the prior year. Earnings per share for the year was a record $2.86, an increase of 2% from the prior year. Credit continued to demonstrate strength in all measures. We ended the year with no real estate owned by the bank, remarkable for a bank with a $13.5 billion loan portfolio. We declared dividends of $1.37 per share, an increase of $0.04 per share or 3% over the prior year. The company has declared 147 consecutive regular dividends and has increased the regular dividend 48 times. We completed the acquisition of Altabancorp, with assets of $4.1 billion, the largest community bank in Utah and the number one rated growth market in the country and the largest acquisition in the company's history. In December, we transferred the listing of our common stock to the New York Stock Exchange, consistent with our longer-term growth plans and outlook. And finally, we're close to wrapping up the PPP program that began in early 2020. During that time, we made almost 24,000 loans for $2.1 billion, and at the end of 2021 only had $169 million of loans that have not been forgiven. We expect most of these remaining loans with $5 million of net deferred fees remaining to be forgiven in early 2022. We saw excellent loan growth in our markets with Utah, Arizona, and Colorado leading the growth across our eight-state footprint. We are pleased to see the strong performance in commercial real estate lending growing organically $175 million in the quarter. New loan production for the quarter was robust, with a record $1.9 billion in new loans originated. We updated our full year 2021 growth target last quarter to 8% to 10%. We're very pleased to end the year topping that range coming in at 11%. We're starting 2022 with excellent momentum and a strong pipeline of new loans. Core deposit growth continues to be surprisingly strong across our footprint, driven by access with customer liquidity due to unprecedented government stimulus and reduced spending due to the pandemic, along with our success in establishing new deposit relationships. As a result, customers and businesses are beginning 2022 with very strong balance sheets. More importantly, the stable and sticky core deposits have a cost of seven basis points, down six basis points from a year ago. Non-interest-bearing deposits increased $2.3 billion or 43% over the prior year and are now 37% of core deposits. Total debt securities of $10.4 billion increased by almost $5 billion or 88% from the prior year. We continue to purchase debt securities with the excess liquidity from the increase in core deposits. Debt securities represented 40% of total assets at year-end compared to 30% at the end of 2020. We fully invest excess deposits in highly liquid and high-quality investments with shorter durations given low, but increasing rates, with a plan to put these deposits to work as loans as we continue to grow. The company's net interest margin as a percentage of earning assets on a tax-equivalent basis for the current quarter was 3.21% compared to 3.39% in the prior quarter. The core net interest margin for the quarter, excluding PPP, excluding discount increases, and non-accrual interest, was 3.04% compared to 3.17% in the prior quarter. Earning asset yields have decreased from the combined impact of the significant increase in the amount of debt securities and the decrease in yields on both debt securities and core loans. The yield on debt securities ended the quarter at 1.5% compared to 1.62% in the prior quarter. New investments in debt securities were added at 1.26% in the quarter. It appears that we are close to a positive inflection point when the improving yields on new debt securities will exceed the portfolio yield. The yield on the loan portfolio ended the quarter at 4.7%, down 16 basis points from the prior quarter. We added $1.9 billion in new core loan production with yields around 4%, which drove the total loan portfolio yield down. Non-interest income of $34.4 million declined $453,000 or 1% from the prior quarter and decreased $10.3 million or 23% from the same quarter last year, primarily due to the reduced gain on sale of income from residential mortgages. The hot housing market and refinancing slowed down a bit across our footprint. Our biggest concern in the real estate business remains the supply of homes available for sale and the increasing cost of housing. Non-interest expense includes $17 million of expense from the Altabank division, $8.2 million of acquisition-related expenses, $806,000 of increased compensation and employee benefits due to incremental overtime given staffing shortages at several bank divisions, $1.1 million of expenses primarily due to branch upgrades, and $600,000 of increased loan expense due to strong loan growth. Excluding the Altabank division and acquisition-related expenses, non-interest expenses increased by $5.3 million or 5% from the prior quarter and decreased by $1.8 million or 2% from the prior year fourth quarter. While the PPP program is in its final stages of winding down, with most of the remaining loans expected to be forgiven in early 2022, I would like to recognize the entire Glacier team for the exceptional work they have done on the PPP program over the last two years. I'm very proud of how the team responded so quickly to help our many customers who were frightened and concerned about their businesses at the outset of the pandemic. It's a great reminder of the responsiveness of our model and our focus and commitment to Main Street businesses across the west. Our combination with Altabancorp continues to proceed very well. We closed on that transaction on October 1st, and we continue to work closely with the Alta team on the planning for our core processing conversion in mid-March of 2022. We are on track to achieve the targeted cost savings in 2022 that we identified when we announced the transaction in May of 2021. Alta has a very good technology platform, and we are studying many of the products that may be a good fit for our other divisions. Tangible book value per share for the company increased in the quarter from $19.11 to $19.33, or 1%. On a full year basis, tangible book value increased by 6%. The Glacier team accomplished a lot in the fourth quarter. We had to deal with COVID in many markets and close Altabank, the largest acquisition in our history, and the team still achieved record results. The loan growth we experienced in the quarter was great to see, and we think we are well-positioned to grow in 2022. In December, we were pleased to be recognized as one of the best emerging regional banks by Bank Director Magazine, as part of its 2022 Ranking Banking Study, which identifies the Best Banks in the United States based on quantitative metrics, as well as a qualitative analysis of innovation and leadership. So, with that, Latif, that ends my formal remarks. I would now like to turn the call back over to you to open the line for any questions that our analysts may have.

Yes, sir. Our first question comes from the line of David Feaster of Raymond James. Please go ahead.

Hey, good morning everybody.

Good morning, David.

It was great to see the strong growth in the quarter and hear the commentary around the increased production. Just curious about some of the puts and takes with that. How much has Alta contributed to that? And maybe kind of what you're seeing from an economic standpoint, just the pulse of your local economies and how you think about growth into 2022 and the composition of your pipeline and what segments you're expecting to drive growth?

Sure. It was very broad-based across the footprint. As I noted, Utah had very strong growth. This is all organic growth. They did very well, as I noted, as the number one growth market in the country. So, we're seeing very strong trends there. Arizona continues to benefit from the in-migration from California, which is very positive. Colorado continues to do very well. I think that, David, the eight states that we're in are all doing very well. The Western United States continues to benefit from a lower cost of living, a business-friendly environment, and a high quality of life. Those things continue to draw people in. On the lending side, we continue to see people very confident to move forward with plans for buying properties in our markets, as well as expanding their existing businesses. So, all those things have combined to lead to the type of growth that we were able to propose for the quarter.

Okay. That's helpful. And then, we hear a lot about inflationary pressures weighing on expenses for the industry. You somewhat have a luxury yield from the Alta deal, which provides some flexibility. Could you walk us through some of the puts and takes with expenses that we had into this year, with the upcoming conversion and some of the synergies from that, as well as other investments that you might have upcoming, and what you think a good core run rate is? How do you think about expense growth considering the seasonally higher first quarter?

Yeah. I'm going to ask Ron to comment on expenses. You're right. There are a lot of moving parts, especially this quarter with the acquisition of Alta. I think we have a good view of what we see that expense run rate looking like. Ron, you want to comment on that?

Yeah. Hey, David. When you saw that we had $134 million non-interest expense, as Randy said in his remarks, $8.2 million of that was acquisition-related. If you take that out, we're at $125 million, and we're estimating for the first quarter run rate that expenses would be, say $128 million, with a maximum of $130 million, but I think it'll be closer to the $128 million. And so, that's the run rate. Just recognize in the first quarter, in mid-March, we're going to have the conversion for Alta onto our system. And so, there'll be some elevated merger-related expenses that we'll identify. But putting that aside, the run rate for the first quarter is $128 million.

Okay. That's helpful. Thank you. Just kind of touching on new loan yields in the competitive landscape. How's pricing trending on new loan yields? Do you think has add-on rates started to trough or even potentially improved just given the move in the 10-year? It sounds like we're seeing it on the secure side. Any other comments from the competitive landscape? Are you seeing more pressure on structures or standards, or is it just mostly on the pricing front? Are you finding yourself passing on more deals?

Sure. Let me just comment at a high level on loan pricing and then Tom can provide a little more context to some of the other parts of your question. Overall, loan rates are under pressure. We anticipate rates going up as expected. The five-year, where we price a lot of our loans, is a fulcrum point. It really hasn't moved and stayed relatively flat. We're hoping to see some movement there. We also think the excess liquidity in the market and the level of competition out there means that any kind of increase is going to be delayed and that we'll not take full advantage of a rate increase because of the competition and the liquidity that people have to put to work. We feel that we will see those improve, but it will take longer than it normally does when rates start to go up. Tom, did you want to comment on loan pricing and some of the second part of David's question?

Sure. Yeah. I'll add to that. Loan pricing pressure seems to be somewhat geographic now. In some of the larger markets, we see greater pricing and structure pressure, and it also depends on the size of the deal. Generally, for the larger deals that we're looking at, we see some pressures there. As for structures, we are seeing an increase in competitive pressure on the structure side, especially in the larger markets on the larger deals, with more of our competitors offering non-recourse and longer interest-only periods. We're just not going to play in that space. We have passed on a number of deals in the past couple of quarters due to structure and not pricing. We'll continue to maintain our strong credit culture.

Okay. That's helpful. Following up, Randy, on the comments about potential Fed hikes. Have you updated your asset sensitivity, handy pro forma for Alta, and how you might expect the margin to benefit from the first rate hike?

Sure. I'm going to let Byron comment on asset sensitivity. We've spent a lot of time starting to look at that in anticipation of these rate increases. Byron, do you want to comment on that?

Sure. We are optimistic about the rate environment. We are asset sensitive, and we are more asset sensitive than we have been in the past. Also, we moved in that direction, given their shorter duration and greater concentration of time-based loans. If you look at our overall loan portfolio, roughly 25% of our loans will mature or price this year. In addition to that, we have a lot of cash flow coming off of our securities portfolio, which will give us the option to either remix that cash flow into the loan portfolio or put it to work in the higher rate environment that we anticipate. Higher rates will be helpful to our bottom line, complemented by all the expected loans.

That's helpful. Thank you.

Thank you. Our next question comes from Jeff Rulis of D.A. Davidson. Your question please.

Thanks. Good morning.

Good morning, Jeff.

Looking at the mortgage gain on sale, maybe a little lighter than I had expected. I was wondering if Alta had been running around a couple million a quarter. Was there any strategic change with that platform? I'm just trying to get a sense of what Glacier legacy came in on gain on sale versus outset, and if there were any pivots to their book of business as you brought it in?

Yeah. No. They've got a very good mortgage business. The change there, Jeff, is really just a reflection of what's going on in the overall market. Originations were down in Utah. A lot of it is the issue of supply. We're just getting to a point where housing is very difficult to find; we have more realtors than houses in most of our markets right now. That gives you an idea of the level of the market. So, really nothing more than we just saw downturn. The platforms are up. They’re doing great. It's just the amount of business that’s out there to be done that was significantly affected in the fourth quarter, and that's primarily supply-driven.

Yeah. Randy, any thoughts on the 2022 backdrop for gain on sale?

We like our mortgage business. We really like the Alta mortgage business and how they are positioned. Some of that technology they deployed, we are going to roll out to the rest of the division. We're excited about that. We still, at this point, look at the MBA forecast. They're calling for the market to be down about 30% year-over-year. We will probably fall in line with that, maybe do a little better. We think we're in better markets than the overall United States. The eight states we are in are leaders in terms of the amount of activity in housing. They are also leaders in appreciation, price appreciation. So, that goes back to the supply and the number of units that come on the market. Refinances are probably going to be dialed back a bit, given rates are going to move up and purchases. We are in strong markets but are limited by the amount of supply available for sale.

Okay. And then, just wanted to touch on credit. You had a decent size, 90 days past due balance that increased. You referenced what you brought over from Alta added to that. So, first question is, do you see that balance having a quicker resolution? The second part related to credit is you did see an increase in the 30 to 89 days early delinquency. Any color on that bucket?

Yeah. Tom can cover that. There's really two things happening there. The movement in the MBA was really related to the acquisition and delinquency. So, Tom, do you want to comment on it?

Yeah. The over 90 and the increase in 30 to 89 was predominantly due to one relationship and multiple credits, and I expect that to be resolved this quarter. It's more of an administrative past due, and we're in the final stages of resolving that. So, I would expect that to be resolved here fairly quickly.

Okay. So, I think about $25 million in the 30 to 89 days, and then even the 90-day pass due that brought over from Alta, again, resolution expected in the first quarter.

Yes.

Thank you. Our next question comes from Brandon King of Truist Securities. Your line is open.

Hey, good morning.

Good morning, Brandon.

So, I first wanted to touch on loan growth. You had a strong year in 2021, and a lot of your competitors are now expecting even stronger growth in 2022. I wanted to know how confident you are in achieving a similar growth of 11% in 2022.

We're looking towards low double-digits for 2022, pending some headwinds that ourselves and the industry as a whole is really facing right now, such as supply chain issues, increases in construction costs, and elevated payoffs compared to historical averages. All those things are still headwinds, but we're fairly confident in low double-digits for 2022.

Okay. Regarding commercial real estate specifically, I understand that higher rates could lead to lower payoffs. Is that reflected in your outlook based on what you're hearing from your customers?

Yeah. I think there’s certainly an impact. Rates are so low today. I'm not sure what difference a 25 or 50 basis point increase would make on that, but there is certainly an element of that should help slow those payoffs down.

Okay. And then, deposit growth is also very strong in the quarter. I'm wondering what sort of deposit growth assumptions you are currently anticipating in 2022? And do you think loans will outpace deposit growth in 2022?

Yeah. We do. We think deposit growth is probably going to be in the high single digits, while we see loan growth in the low double digits. So, we think that things will slow down. It has been incredible so far with the amount of deposits. Every quarter when we think it's just got to stop, it continues. But we're starting to see some signs that it might throttle back. So, probably in the high single digits for 2022.

Okay. And then, I guess all that put together with that assumption, we would see not much growth in the securities, correct, as you're deploying that cash more to loans? Is that a good assumption?

We hope so. Yeah. I mean, we're still going to see our investment portfolio grow. There’s just enough cash coming in to do that. But yeah, our hope is that given the strong growth rate we've seen in the fourth quarter and the full year of 2021, we can carry that into 2022. As Byron noted, we've got the investment portfolio fully invested, but short and high quality, so as those things roll off as new deposits come in, we would love to put those to work at higher yielding loans. That's the plan.

Okay. And lastly, regarding M&A with the closing of the Altabank transaction, how likely could we see another deal this year based on what you're seeing in your appetite currently?

We continue to talk to folks. We always keep the door open. Our focus right now though is to get Altabank closed and converted. We've closed it. Now we want to convert it in mid-March. The EPS lift we get from doing that well is significant. So, we're going to stay focused on that. I wouldn't expect to see anything in M&A at the earliest an announcement towards the later part of this year, late third quarter, fourth quarter, if at all. We're keeping conversations going but pushing the timing out to ensure we do everything right. It's going really well, and there's a lot of earnings for us to recognize. We want to get that behind us then if the mechanics work out for – it's probable you'd hear an announcement in late third quarter or fourth quarter.

Okay. And nothing has changed as far as what type of potential targets you would consider?

Absolutely not. We still have a wide range of prospects that we look at, ranging from $300 million to $3 billion, as we've said. We went very large with Alta, but that was a great opportunity that was put in front of us. I expect our traditional historical focus will be around $750 million to $1.5 billion, but if something larger comes along that fits our strategic view, we'll take a hard look at it. If something a little smaller comes that we think we can do very well with, we'll take a look at that as well.

All right. Thanks for all the answers.

You're welcome.

Thank you. Our next question comes from Kelly Motta of KBW. Your question please.

Hi. Good morning. Thank you so much for the question. I wanted to circle back to expenses. With Alta closing and converting in March, do you expect Q2 2022 to be somewhat of a clean quarter expense-wise? Just any help with the piece of cost saves realization, as well as how that nests out with some of the inflationary pressure you're seeing in your markets? Appreciate the color on 1Q, but I'm trying to kind of navigate the dynamics for the year. Thanks.

Sure. So, I think Ron gave the color on 1Q, so we're expecting a feeling of $128 million to $130 million on expenses for the first quarter, not including the M&A expenses. In terms of the cost savings, when we announced the deal back in May of 2021, we did identify 80% of the cost savings are at 17.5% of their non-interest expense. We are on track to achieve those, and those will be more weighted towards the end of the year. Looking at the third quarter, we'll get the conversion done in March and then start to see some of those things show up in the second and third quarters. So, those are kind of more weighted towards the middle to end of the year, Kelly, as we see those come to fruition. We feel really good about achieving them; we just have to get through the conversion and some of the expenses that take place after that.

Got it. Understood. And then, I believe in your prepared remarks, you talked about how Alta had some technology that you were looking to roll into some of your other divisions. Just wondering if you could speak more broadly about tech investment and kind of the appetite for what you're looking to do and how that factors into that expense commentary you just gave, whether or not there could be some additional increases from some of those investments coming through? Thank you.

No, let me first start with the platform that Alta provided and the technology involved. We are capitalizing on a significant opportunity. As a Jack Henry Bank, we have strong third-party applications integrated with the Jack Henry core. We can assess this technology in real-time, which has been beneficial for us. We plan to introduce several initiatives following our focus on the conversion and how to implement these technologies across our other divisions. These initiatives include a commercial loan origination system that automates the loan process, yielding some savings for us this year. This will enhance our efficiency in construction lending and how we handle payments at the teller line with a teller capture system, ultimately reducing staffing requirements in the branch. These are all areas we are examining. Regarding the substantial investment, a significant portion of the initial cost is associated with M&A expenses. We need to determine how to integrate these technologies, and much of that cost will not be recognized as typical outside of a transaction. Therefore, there won’t be a noticeable spike in technology expenses, which I believe addresses your concern. This has been factored into our deal expenses. Concerning the benefits of technology, there will be some costs incurred this year, but we do not anticipate any impact that would push us beyond our 54% to 55% efficiency range. We are committed to maintaining that, but we also expect some promising cost savings to start emerging this year, depending on how these technologies are deployed.

Got it. Thank you so much. That was really helpful. I'll step back.

Our next question comes from Matthew Clark of Piper Sandler. Please go ahead with your question.

Yeah. Good morning, gentlemen.

Good morning.

Can you provide insights on the loan growth this quarter specifically related to commercial real estate? I'm interested in understanding the major contributions from your area or affiliated entities. Were there any significant deals included in that growth? I'm looking to determine if there were a few larger credits that contributed to the increased growth, and what was the size of the three largest loans you issued this quarter?

Sure. There was good broad-base growth, but Tom can give you a little more color specifically to your question about the makeup of the growth.

Sure, Matthew. In the CRE book, we're still seeing a lot of demand for industrial warehouse growth as the business moves follow a lot of the immigration and population. So, we're seeing that. We also saw some nice multifamily growth in construction related to CRE and multifamily as well in the quarter. In terms of the size of the production, nothing out of line compared to what we’ve done over the past several years. Certainly, there were some eight-figure credits that came through in the quarter, but no individual credits stayed above kind of that $20 million area. On average, we see the average loan size in the CRE book around $600,000, and that really hasn't changed much.

Okay. That's very helpful. Thank you. Randy, you mentioned maintaining that efficiency ratio in the 54% to 55% range, I think for this year. Correct me if I’m wrong? But you’ve got a step up in expenses based on the guide; you've got the 80% of the cost saves coming through by the end of the year. You also have kind of seasonally lower mortgage. I heard you on the loan growth, maybe that's kind of making up for some of it; low double-digit loan growth. Any comments around the near-term margin outlook?

No problem. Well, I'll ask Ron to talk about the margin, but you got it right. We anticipate very solid growth and still maintaining our target of a 54% to 55% efficiency range that we see staying in that range in 2022. Ron, did you want to comment on the margin?

Hi, Matthew. The outlook for the margin, particularly in the first quarter, is that we've had declining margin. We see it flowing particularly for the reasons that we've said; low double-digit loan growth and high single digits in deposits coming in, which we're able to put to work at higher rates than what we did in the fourth quarter. In the fourth quarter, we were able to put on the investment securities that were high quality shorts, predominantly in the four to seven-year treasury, but we brought those on at just say 125 basis points. With the rate movement in the U.S. treasury curve, in the last 60 days, we picked up 45 basis points in higher rates and are able to put on securities in the 170 to 180 range. That’s very incremental to our margin. Again, we want to put it into the loan portfolio. But in the meantime, we can put it into the securities portfolio. The guide I would give on the margin is that it should be somewhere between say 305 and 310, somewhere in that range. We're starting to see the ember results of an inflection, and we're optimistic that this should continue with expectations of low double-digit growth in loans and a slowdown in deposits that came across in 2021—this bodes very well for us to have good net interest income and stay in line with our efficiency ratio of 54% to 55%.

Great. Thank you. Just housekeeping on the tax rate, kind of moving around a little bit. What should we assume for the outlook this year?

We're glad you asked about taxes because we did want to comment on that. There was a very high tax rate in the consensus, Ron, do you want to comment on those?

Yes, I do. It'll ramp up in the first quarter. I would use 18.5%, but it will ramp up throughout the year to as high as 19.5%. For the full year, I'd estimate it will be closer to the 19% rate, just given the economies that we're in and the growth we're seeing.

Great. Thanks for the call.

Thank you. At this time, I'd like to turn the call back over to Randy Chesler for closing remarks. Sir?

Right. Thank you, Latif. We want to thank everybody again for dialing in today. We know there's a lot of activity towards the end of this month, and we appreciate you taking the time to join us. We wish everybody a great Friday and a great weekend. Thank you again for spending part of the morning with us.

And this concludes today's conference call. Thank you for participating. You may now disconnect.